EXERCISE 12-17 (20 MINUTES)

3. No, the company should concentrate its remaining inventory of X7 chips

on making product A, not product B. The company should focus on the

product that will provide the greatest amount of contribution margin.

Under the conditions posed, product A will provide the greatest amount

of contribution margin since (1) it has a CM ratio of 72% as compared

to only 60% for product B; (2) the two products have the same selling

price, and therefore, due to its higher CM ratio, product A will generate

a greater amount of contribution margin per chip than product B; and

(3) the two products require the same number of chips per unit.